The Political Economy of Central Bank Intervention

Geert J Almekinders

Public Choice, 1996, vol. 88, issue 1-2, 127-46

Abstract: This paper analyzes an exchange rate policy game between a central bank and rational spectators under symmetric information. The central bank tries to counteract shocks to the exchange rate by means of sterilized intervention working through the expectations channel. Private speculators resist being fooled. They anticipate the interventions. An 'intervention bias' results with an inefficiently high equilibrium volume of intervention which does not reduce the impact of shocks to the exchange rate. The model implies that, the more independent the central bank, the smaller and the more consistent the intervention efforts. An empirical illustration lends some support to the model. Copyright 1996 by Kluwer Academic Publishers

Date: 1996
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